One year after the EU and the United States introduced sanctions against Russian individuals and legal entities, the world has not became any more stable, and peace in Ukraine has still not been achieved. At the same time, the impact on the economy has been dramatic. The European and U.S. sanctions seem to be the most challenging factor for western companies doing business in Russia. As sanctions lists and types of sanctions have got more and more complicated during the last year, clarity has decreased and risks have increased dramatically. As a result, many foreign investment projects are being put on hold. According to the February survey of the German-Russian Trade Chamber AHK, over 70 percent of German companies have fear of “bad” or “very bad” impacts of the current situation on their businesses in the year 2015, and 49 percent say that they were afraid that Russian partners would turn to China instead of Europe.

For example, a European company which used to run its business in Russia is now confronted with four different sanction regimes of the EU. There is a list of sanctioned persons to whom the provision (directly or indirectly) of economic resources is no longer allowed. In certain situations this means you may not even deal with a subsidiary of a listed company, or with a subsidiary of such a subsidiary. There are also sectorial sanctions prohibiting arms exports to Russia, introducing control measures on the export of goods of dual use, or banning certain Russian banks and companies from access to European capital markets. These sanctions also forbid the export of technologies required for deep-sea oil drilling and shale oil production. An additional sanctions regulation introduces a special list of companies completely banned from access to the dual use goods. Finally, there are geographically related sanctions banning investment in Crimea (including capital increase for existing companies) and cooperation with companies located outside of Crimea if deals involve Crimean infrastructure (energy sector, telecommunication, production of mineral resources and transport infrastructure).

A U.S. company (or an EU company that wants to comply with the U.S. sanctions because of its business interests in the United States) is confronted with an equally complicated sanctions regime that forbids direct and indirect economic contact with certain persons (from a so-called SDN-list), providing access to the capital market for persons on an SSI-list and exports of many goods of dual use to Russia.

Most problematically, the current sanctions are very complicated and often leave room for many opposing interpretations. For example, it is not clear whether a European citizen, acting as general director of a Russian legal entity, may sign a contract with a sanctioned Russian legal entity. Some experts believe that whilst acting as general director of a foreign legal entity, a European citizen acts as a legal part of this entity and therefore does not violate the sanctions that forbid him to provide economic resources to a listed person.

If read literally, the sanctions regime would demand from a German or French manager who acts on behalf on a Chinese subsidiary of a Brazilian company to check if his Indian counterpart is a subsidiary of a sanctioned person (for example, a warlord from the Donetsk region), because as an EU citizen he or she must comply with the EU sanctions even acting abroad. Of course this is not possible, but it demonstrates how irritating the sanctions regime can potentially be.
Many banks refuse even to finance deals which do not in any way violate sanctions, just because of their overcautious approach. I have seen cases when a Western bank refused to accept a money transaction as a payment from a non-sanctioned company for non-sanctioned services, just because the paying customer was a Russian company. All this can really disturb business.

Another example is export regulation. The German chainsaw producer "Stihl" faced unexpected troubles while exporting to Russia in late 2014 when they found out that their saws may not be exported to Russia because of the sanctions bans. The reason was a tiny little part the size of a 2-Euro-coin, a displacement pump used to lubricate the motor, that was hidden in every unit. Displacement pumps were put on the EU list of sanctioned goods because the same type of pump (but of a completely different size) is used in the oil industry. For this reason "Stihl" had to obtain a special export permit for every saw delivered to Russia. This example demonstrates how the sectoral-related sanctions, which were planned to be very smart, can unpredictably hit unrelated companies.

Still, even though we hope that sanctions will be lifted soon (including of course the Russian counter-sanctions), the most important thing we must think about right now is how to re-build the regions hit by the conflict once peace is achieved. Right now we must think how we will integrate Ukraine and Russia into one unified zone of peace, stability and economic development with the EU after the conflict.

Clearly it is impossible to rebuild the regions without huge international support. The European Union should demonstrate its will to help the regions and show an understanding of the famous quote by former German federal president, Richard von Weizsäcker; “one should not want to move the states’ borders, but to neutralize the divisive nature of borders.”

An international investment plan could be introduced for Donbas, and clear rules of economic integration of Russia and Ukraine should be presented. A common economic zone stretching from Lisbon to Vladivostok would be a way of integration and creating long-lasting economic links, making the whole continent stable, prosperous and transparent.

Today, amid the ongoing fights in Donbas, it may sound naïve, but then how naïve would those who dreamed of a European Union in the later 1940s have sounded? Who could have imagined that archenemies Germany and France would turn into the pillars of European integration and start to construct a united future? That’s why we must be exactly as open-minded and ambitious today as 70 years ago, and insist that it is necessary to dream about a Europe integrated with Russia and Ukraine, without sanctions and without borders. It is the only way to create a sustainable future. In some decades these dreams will be thought of as global thinking.

Sergej Sumlenny is head of Task Force Sanctions at Russia Consulting Group.

By:
  • Sergej Sumlenny